Re: Money, Taxes, and Government Debt

[wfhummel@xxxxxxxxxxxx (William F. Hummel)]

Gelles wrote:
>
>        "Monetary base money" is comprised of currency
>        and coin and other things.  What are they?  And is
>        the monetary base all owned by private sector firms
>        and people?  Must all deposits qualified to be called
>        a part of the base be in an account directly recorded
>        by the Fed itself, or only with any commercial bank?
>
Glad you asked.  Let's start with the term "definitive money"
which refers to all the monetary liabilities of the Fed and the
Treasury.  It comprises Federal Reserve notes, deposits at the
Fed, and coins issued by the Treasury.  All of the monetary base
is definitive money, but not vice versa.

The monetary base comprises only that definitive money held by
the public, i.e. what is directly involved in the U.S. economy.
It excludes what the Treasury holds as cash and on deposit at the
Fed, known as the General Account.  It excludes definitive money
held by the Fed, which includes some coinage.  Finally it
excludes deposits at the Fed held by foreign central banks.

In principal the monetary base should exclude currency held
outside the U.S.  That is estimated by the Fed to be about 60% of
the total currency outstanding.  However since there is no way of
determining that, the monetary base includes all notes issued by
the Fed, other than what the Treasury holds.  Obviously one needs
to be careful in using the figures for the total monetary base
since about half of it is outside the U.S. and has relatively
little effect on the U.S. economy.

>        What about the support for money -- like interest
>        bearing bonds or gold, or the values of assets and
>        future cash flows pledged or relied on in exchange
>        for its creation?

You are referring to money flows quite apart from the stock of
money known as the monetary base.
>
>        Bill Hummel suggest the diagram of the base is easy
>        to understand. What about M1 itself, how much of it
>        is the base?  Is the base synonymous with state money?

That portion of M1 created as demand deposits through bank loans
is not a part of the monetary base.  The term "state money"
generally refers to the money issued by the state to the public
through its spending and lending.  That exists in the form of
coins, currency, and deposits at the Fed owned by the private
sector, mainly the reserves of commercial banks.

>        As I recall "The Bankers" took 40 pages to explain how
>        a simple check to pay a bill is processed. I have a feeling
>        the monetary base and money outside the base are both
>        not easy to understand.  The only easy thing to understand
>        is what's it like to have no money.

Oh, there are a lot of other things that are not easy to
understand.  "The Bankers" was a rambling effort that had a fair
share of errors.  It read like it was written from memory in one
sitting.  If you want a good reference on our monetary system,
try "Financial Markets and Institutions" by Meir Kohn, 1994,
McGraw Hill.  But don't expect to find anything about the
endogeneity of the monetary base in it.

William F Hummel